Retail Innovation Tesco in the United Kingdom - Agriculture and Agri ...
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MARKET ACCESS SECRETARIAT
Global Analysis Report
Retail Innovation
Tesco in the United Kingdom
June 2016
EXECUTIVE SUMMARY CONTENTS
Grocery retailing has evolved rapidly over the last decade. The Executive Summary ........................1
digital transformation of the industry and fierce competition has
encouraged retailers to shift their efforts toward Multi-Channel Company Snapshot .........................2
retailing. Meanwhile, recent economic events have spurred retailers
to look for opportunities to reduce costs and increase operational Multi-Channel Retailing ...................2
efficiencies through IT infrastructure investments, while also
adjusting their strategies for growth. Efficiencies in the Supply Chain ....4
Conclusion .......................................7
Tesco, the largest grocery retailer in the United Kingdom (U.K.),
and has been a leader in retail innovation both at home and abroad For More Information .......................7
for a number of years. However, 2014 was a difficult year for Tesco,
the company’s global sales dropped by 3%, which made Tesco the Resources .......................................8
only one of the top 10 retailers to suffer a decline. This caused
Tesco to sell its non-retail subsidiaries Blinkbox, Tesco broadband
and phone services, and they are attempting to sell their datamining
firm, dunnhumby. With the sale of these assets, Tesco will be
reinvesting in their current stores and opening new Tesco Express
stores in convenient locations.
Even with the decline in sales, Tesco’s home-shopping grocery
network, offered through the retailer’s largest online banner
Tesco.com, is recognized as the U.K.’s most successful online
grocery retailing model and posted an operating profit for the 2014
year.
This report identifies two fields of innovation currently being
undertaken by Tesco: Multi-Channel Retailing, and finding
efficiencies in the supply chain. The objective of this report will be to
describe how these approaches are being used by the retailer to
maintain and capture new market share and how this way of doing
business will ultimately affect Canadian exporters.
Visit our online library of public
reports for more information on this
and other markets.TESCO: COMPANY SNAPSHOT
Tesco is a U.K.-based international grocery and general merchandising retail chain, with a presence in 14
countries, including South Korea, Thailand and Ireland. It is the largest retailer in the U.K., operating
hypermarkets and superstores, and is growing its share of smaller stores and online sales.
Tesco, U.K., Grocery Banner Sales, US$ Millions
E F F F F
Year 2014 2015 2016 2017 2018 2019
Banner Sales 57.8 55.3 56.4 57.8 59.4 61.0
Outlets 3,618 3,651 3,721 3,793 3,863 3,934
Source: Planet Retail 2015, E= Estimate, F= Forecast
Tesco is projected to have a decline in sales for 2015 as they adjust their strategies, but after that it is
projected there will be moderate growth through 2019. The company has a number of ways to reach
consumers:
Tesco Extra: is a hypermarket that is mainly located out-of-town in suburbs, it stocks almost all of
Tesco’s products.
Tesco: is a superstore, which holds standard groceries and a small range of non-food goods.
Tesco Metro: is a supermarket, found mostly in city centres and near train stations for ease of
use.
Tesco Express: is a convenience store, these are found in busy city centre districts and because
of their small size their prices are a bit higher than their larger stores.
One Stop: is a convenience store, normally found in smaller communities.
Tesco.com: is their online store, both food and non-food products are available to purchase.
Sales are declining for the 4 big UK retailers (Tesco, Sainsburys, Asda-Walmart, and Morrisons) as they
are facing tough competition from the German Discounters, Aldi & Lidl. The rise of the discounters is
showing no signs of going away, even with the end of England’s recession. Because of this Tesco is in a
transition; they are in the process of selling some of their assets. The have already sold their two
branches, Blinkbox and Tesco broadband and phone services, and they are in the process of trying to sell
off dunnhumby. Once these are sold they will be able to use the proceeds to reface/update their current
stores. Their plan is to make their stores more attractive and convenient to consumers (news.sky.com,
2015).
Recently, there has been a scandal that has come to light involving the way Tesco treats their suppliers
and how they receive income from their suppliers. Tesco was making their purchasing agreements with
suppliers exceedingly complicated. There is 24 different ways that Tesco can bill a supplier, and there is a
goal to bring that down to only three (volume, premium positioning on the grocer’s shelves, and
compensation for items that have to be recalled). Because of this, Tesco is now working hard to rebuild
their relationships with suppliers (Telegraph UK, Feb 2015).
MULTI-CHANNEL RETAILING
st
Multi-Channel retailing has become a dominant theme for retailers in the 21 Century, and Tesco has
taken a leading role in seizing the opportunities that Multi-Channel retailing has to offer.
Future market trends in the grocery retail industry point to a growing importance for versatile stores with a
narrower and more relevant product portfolio. Furthermore, thanks to the rampant spread of mobile
Page | 2technology across developed and emerging markets, consumers will increasingly require a seamless
shopping experience between online and physical stores. Tesco is headed in this direction as the
company progressively reduces its exposure to capital-intensive hypermarkets and develops its
e-commerce business alongside smaller supermarkets and convenience stores. All three channels will
experience faster growth than hypermarkets globally (Planet Retail, 2015).
In addition, Tesco.com has been innovating to stay ahead with the launch of market-leading tools, such
as a shopping app for the iPhone, Andriod, and iPad, its Click & Collect drive-through supermarket, and
virtual supermarkets, and the creation of its own Hudl Tablet.
Applications for Smartphones and Tablets
British consumers today can shop anywhere and anytime via their mobile phones, using the free Tesco
grocery shopping app for smartphones. The app offers benefits such as the use of an embedded barcode
scanner for quick orders, as well as the ability to sync one’s orders between multiple devices (Planet
Retail, 2015).
Consumers have access to thousands of products online, all of which are deliverable directly to their
homes. The “Tesco’s online” portal, in particular, offers everything from food to hardware to sports
equipment. The information available on this site, and others like it, offer great value to vendors looking to
gain some market intelligence prior to a market visit or just for strategic planning purposes. Photos of
local products are provided, along with their prices, and can give Canadian vendors an idea of what is
being sold in Tesco stores in the U.K. This information may also shed light on the potential success of a
product in the market. For example, if a Canadian vendor’s pricing is not competitive for the U.K.’s market
based on an initial online study of market pricing, the U.K. may not be a good fit for the vendor’s product
(Planet Retail, 2015).
There are also thousands of recipes, videos and cooking tips available on the “Tesco Real Food” site.
Customers can also find recipes via Tesco’s free “Recipe Text Service,” which allows Tesco mobile users
to receive a list of relevant recipes on their phones by texting a key ingredient to ‘COOK’. These recipes
are offered by Tesco based on their knowledge of their customers’ preferences and can provide
information to vendors as to the ingredients and flavours that are popular among this segment. This type
of market intelligence can help vendors identify where their products would fit into the market or how they
can add value through cross-category sales (Tesco.com, 2015).
Tesco has expanded the capabilities of its mobile app by offering consumers in South Korea, the
opportunity to shop while waiting for the bus or subway by simply pointing their mobile phones at products
on billboards. As a result of the positive reaction to their virtual store in Seoul, Tesco launched an
interactive virtual grocery store at Gatwick Airport in London to help vacationers shop using their
smartphones prior to returning home from their trip (Tesco.com, England, 2015).
Click and Collect Drive-Through
The push towards e-commerce has allowed Tesco to offer a more personalized service to their
consumers based on their personal lifestyles and preferences. For example, Tesco’s “Click and Collect”
grocery service offers a higher level of convenience for customers who pick up items frequently, saving
them from having to find a parking spot and enter the store to pick up orders. The idea is to save the
customer time, for a price. Tesco is working to create efficiencies within the online store to reduce the
cost of delivery and to keep their products competitive. (Euromonitor International, 2015)
This service was first offered to British consumers in the summer of 2011 and is very similar to the rapidly
growing “Drive-Through” service provided by popular French hypermarket Carrefour in France and the
United States. By visiting www.tesco.com/groceries, Tesco customers can select the items they want to
purchase and pick them up from 300 Tesco “Click and Collect” locations (Ourtesco.com, 2015).
Page | 3The U.K.’s societal shift towards the notion of “commerce anywhere” has given Tesco no choice but to
invest heavily in digital solutions to hold onto sales or it would otherwise lose out to other retailers. This
shift toward greater convenience for the consumer creates, in turn, a need for efficient supply chain
workings on behalf of Tesco, thus affecting its vendors. (Retailweek.com, 2015)
For suppliers this means that they will need to be prepared to have their product’s stocked with Tesco so
that they can fulfill any online deliveries they receive. Also, presenting information of your product on your
packaging so that it can be easily viewed online will be helpful for consumers.
EFFICIENCIES IN THE SUPPLY CHAIN
Tesco has invested heavily in creating a robust and flexible supply chain to minimize costs, maximize
profits and reduce the carbon footprint of products sold by 30% by the year 2020. Many of the new
processes and systems Tesco has implemented are the result of the evolution of Tesco’s online
business. Other measures aim to maintain on-shelf availability (OSA), while reducing the number of store
replenishment deliveries and reducing stock levels at both distribution centres and stores (Tesco.com,
2015).
New Stock Replenishment Systems
One of Tesco’s main priorities is to see a substantial reduction in food waste. The retailer plans to
achieve this largely through the use of its automated ordering system, Group Ordering System (GOS) by
Oracle. This system was improved and fine-tuned in 2012 to help the retailer to maintain lower
inventories. Tesco optimizes fresh food forecasts by programming pre-defined acceptable waste levels
into the system, which then suggests an optimal order, including safety stock levels that take promotional
effects into account. This has reduced food waste in stores, while improving OSA, and reducing lead-
times (IGD Supply Chain Analysis, 2013).
The GOS uses a sales forecast created one or two hours prior to when the order is placed, based on the
latest item movement in stores. The order forecast can then be viewed by the vendor through “Tesco
Connect”, the retailer’s extranet connection. Tesco’s ordering system then validates the distribution center
(DC) network’s capability to handle the order prior to placement, and then adjusts order volumes if
required. Tesco has the capability to adjust order quantities just hours before the products are scheduled
to be delivered. The GOS can pull sales data for 48,000 different product lines every hour, allowing for
automated replenishments up to three times a day. Although the order process is automated, store
managers have the ability to manually manipulate order amounts for selected product lines, if there is an
unexpected upturn in demand for a particular product (IGD Supply Chain Analysis, 2013).
Given this optimized stock replenishment system, Tesco expects their vendors to have responsive supply
chains and to deliver on shorter lead-times; otherwise they could be subject to penalties. Vendors who
are already working with Tesco can use resources like “Tesco Connect” and “Tesco Link” to assess their
performance, which allows them to then collaborate with Tesco to improve their lead-times (IGD Supply
Chain Analysis, 2013).
Tesco Connect informs vendors of upcoming promotions and in-store events. The system provides store-
by-store sales forecasts for all promotions across the business by statistically analyzing the mechanics of
the promotion, the type of discount that will be applied and how it will be featured in-store. The portal also
provides details of expected deliveries over seven-day periods. This information allows vendors to
develop short- and long-range predictions of order volumes, taking into account depot needs and unit
load rounding much earlier than before. This allows vendors to be more responsive and improves both
transport planning and OSA.
If not currently in business with Tesco, it is important to be aware of their vendor expectations,
particularly with regards to OSA. According to the Institute of Grocery Distribution (IGD) supply chain
Page | 4analysis, OSA is measured a number of ways within Tesco, including the following:
Supplier service level to distribution centre (% of supplier orders fulfilled)
Distribution centre to store supplier service level (% of store orders fulfilled)
Distribution centre forward stock cover (measured in estimated days’ sales)
Wastage (% of store sales)
Failure to arrive (% of expected deliveries not made to distribution centres)
In addition, the retailer expects vendors to operate within a pre-determined “three-box model,” meaning
that they hold their vendors to the following standards:
Competent: Supply chain fundamentals, systems development, better product streaming, review
days, lead times, buying quantities, promotions planning
Respected: six-day ordering and deliveries, consolidation, day one for day two ordering,
collaborative planning
Famous: seven-day ordering, stockless for ambient and fast moving goods, gap analysis, active
improvements in OSA (IGD Supply Chain Analysis, 2014).
Retail Ready Packaging Initiatives
Tesco, long regarded as the leading innovator in Retail-Ready Packaging (RRP), continues to work
closely with vendors and manufacturers of store displays, shelves and pallets to improve product
packaging and replenishment productivity in-store. These RRP solutions allow products to be moved from
the storage room and placed directly onto the shelf, which has removed several stages to the
replenishment process. This replenishment process is guided by what Tesco refers to as the “Five
Easys”, namely, stock must be (IGD Supply Chain Analysis, 2013):
Easy to recognize in the warehouse (using symbols to identify products rather than words)
Easy and quick to open (to reduce the time taken to replenish)
Easy to replenish with only one touch – shelf-ready packaging that allows store personnel to put
multiple units on a shelf at one time rather than placing items one by one
Easy for customers to shop, offering improved product presentation
Easy to collapse/break down packaging and remove the equipment from the stores
For example, Tesco has worked closely with their bread suppliers to develop one style of tray and trolley
to be used by all suppliers of bagged, sliced bread, to create a harmonized look and reduce inefficiencies.
The new system allows delivery staff to wheel out bread deliveries to their respective aisle and place
trays onto existing shelving units. Individual loaves of bread are no longer touched by store personnel,
thereby minimizing damage sustained during delivery processes.
Supply chain efficiency has also been improved with the introduction of the K-roll pallet. The K-roll pallet
has a foot-activated mechanism that, when kicked by a store operator, lifts runners to expose wheels.
When the mechanism is kicked in the opposite direction, the runners lock down and the device reverts to
being a stationary pallet. These are stackable when empty and loaded, allowing store personnel to
replenish stock quickly and efficiently.
These delivery aids illustrate how leading retailers are reducing lead times and adjusting their
expectations of vendors; vendors should consider how they can make their offering more attractive by
offering such replenishment efficiencies.
Sustainability
Tesco has ambitious goals to reduce energy consumption and related costs, and to contribute to national
energy security and resource efficiency by reducing carbon dioxide emissions. Tesco emitted 5.7 million
tonnes of carbon dioxide in 2012, but plans to become a zero-carbon company by 2050. This is expected
to be achieved in part by using renewable resources to generate all of the company’s electricity, heat, and
Page | 5cooling. Moreover, Tesco aims to reduce all vendor-related emissions in its supply chain by 30% by 2020,
which means encouraging vendors to cut their carbon dioxide emissions in line with Tesco’s objectives.
The strategy to achieve this is built on four pillars, wherein deliveries must provide (IGD Supply Chain
Analysis, 2013):
Fuller cages/pallets
Fuller trucks/containers
Fewer miles
Fuel economy
For now, Tesco has taken an “operational control approach” to measuring its direct carbon footprint,
which refers to managing emissions that the company has full authority over. These emissions are the
result of fuel consumption and refrigerant leakage from company operations on Tesco property,
distribution processes, and business travel. To help reduce these emissions, the retailer is also currently
working with vendors on initiatives such as front-haul trucking to ensure vehicles do not travel empty after
making a delivery. For example, the front-haul approach uses vendor vehicles that have made deliveries
to Tesco Distribution centers to deliver store orders on their return trip. The company has also sought to
reduce carbon dioxide emissions by distributors hired on contract by Tesco, thus extending its
sustainability efforts beyond its immediate supply chain.
Furthermore, Tesco has estimated the carbon footprint of 1,100 products it carries by calculating the
carbon dioxide emissions of their vendors. The company believes these emissions are ten times as large
as Tesco’s direct carbon footprint, and Tesco hopes to reduce these vendor-related emissions by 30% by
2020. The methods for accomplishing this include (Tesco.com, 2015):
Sustainability projects: These projects measure vendor emissions and provide them with
recommendations to reduce carbon dioxide in supplier facilities, such as farms and factories.
Knowledge Hub: This is an online community of Tesco’s 1,000 largest vendors, in which they
share best practices using case studies, webinars, site visits, and forums.
Packaging data requests: Tesco has asked vendors to provide the company with detailed
information on their packaging design, which hints at possible packaging guidelines to come.
Though these projects and initiatives appear to be voluntary for vendors, they could someday be
incorporated into Tesco’s buying standards. Vendors therefore have an incentive to comply, if not actively
participate, in these projects, if they wish to continue working with Tesco in the future.
Supplier Changes
Tesco is changing their strategy with suppliers. Currently there are 24 different ways that Tesco can
charge suppliers; this will be reduced to only three, some of the types of charges include: product
placement, promotions, recalled products, and late deliveries. The retail industry has become dependent
on these different revenue streams; for example, retailers could take compensation so that their products
would have premium space in their store, or even to help pay for in-store promotions. Morrisons, which is
the first U.K. supermarket to reveal commercial income from suppliers, publicized that about 70% of their
payments from suppliers are to help pay for in-store promotions of the supplier’s products (Telegraph,
2015).
Tesco and other retailers like Asda and Sainsbury have added thousands of products over the last 5
years; this has been blamed on the reliance of supplier payments. However, now supermarkets are
attempting to reduce the number of products offered in their stores so that they are able to organize their
shelves with their customers in mind, instead of their suppliers (The Guardian, 2015). Tesco has
formalized this process and have called it “Project Reset”. Project Reset, will look to reduce SKUs by
20% over the next few years. Tesco is aware of the dangers of cutting their products, some product cuts
will affect their customers negatively and with this knowledge Tesco is going to be moving forward
cautiously (The Grocer, 2015).
Page | 6CONCLUSION
Tesco recognizes the need to focus on innovation in order to grow as a business. This is more important
than ever, as the company predicts that the way consumers shop and pay for their purchases will change
more in the next few years than in the last twenty put together. Tesco is striving to be at the forefront of
this change.
Innovation at Tesco will continue to be driven by understanding the needs of consumers and bringing in
products and services that will be valuable and useful. Also, by understanding and identifying how
technology can be applied to meet changing consumer needs. Tesco is working on making their “Click
and Collect” more accessible and opening smaller stores in convenient locations to reach more
consumers.
Tesco is also working on repairing relationships with suppliers and finding new ways to handle contracts
with them. In most markets, only a handful of supermarket gatekeepers stand between thousands of
vendors and their target markets. This leaves vendors with few large, alternative buyers and considerably
less bargaining power. As Tesco and other retailers are now reducing the number of suppliers they have,
it will be important to stand out now more than ever for a supplier, with innovative products and efficient
cost savings through supply chain or other management practices (Uk.Reuters, 2015).
FOR MORE INFORMATION
International Trade Commissioners can provide Canadian industry with on-the-ground expertise
regarding market potential, current conditions and local business contacts, and are an excellent point of
contact for export advice.
Overview of Trade Commissioner Services in U.K.
http://www.tradecommissioner.gc.ca/eng/contact-our-team.jsp?oid=36&cid=114
Find a Trade Commissioner
www.tradecommissioner.gc.ca/eng/find-trade-contacts.jsp
For additional intelligence on this and other markets, the complete library of Global Analysis reports can
be found under Statistics and Market Information at the following link, arranged by sector and region of
interest:
ats-sea.agr.gc.ca
For additional information on ANUGA 2015, please contact:
Ben Berry, Deputy Director
Trade Show Strategy and Delivery
Agriculture and Agri-Food Canada
ben.berry@agr.gc.ca
Page | 7RESOURCES
Euromonitor International, 2015, “Tesco PLC in Retailing (World)”
The Grocer (August 2015), “Tesco Project Reset: big bang or softly softly for next phase”, Retrieved on
October 5, 2015: www.thgrocer.co.uk
The Guardian (March 2015), “Tesco to reduce number of charges imposed on suppliers”, Retrieved on
Sept 11, 2015: http://www.theguardian.com/business/2015/mar/30/tesco-reduces-charges-
imposed-suppliers-after-accounting-scandal
The Institute of Grocery Distribution (IGD). Dawn of a new era for Tesco. Retrieved February 2nd, 2013.
IGD. The future of global grocery retailing. Retrieved February 2nd, 2013.
IGD. The top ten trends for 2012. Retrieved February 2nd, 2013.
IGD Supply Chain Analysis. (February 2012). Tesco.com: Why you must align your supply chain.
IGD Supply Chain Analysis. Environment: Tesco Key Initiatives and Recycling. 2012.
IGD Supply Chain Analysis. Retailer Trends: Four Areas of Retailer Focus. 2012.
IGD Supply Chain Analysis. Supply Chain Analysis Retailer Profile 2012.
IGD Supply Chain Analysis. Tesco Snapshot, January 2013.
IGD Supply Chain Analysis. Tesco Supply Chain Snapshot, Q4 2012.
News Sky (September 2015), “Bidders Abandon Auction of Tesco Data unit”, Retrieved on Sept 15, 2015
from: http://news.sky.com/story/1548835/bidders-abandon-auction-of-tesco-data-unit
OurTesco (Sept 2014), “Click + Collect Groceries now available in 300 locations”, Retrieved on
September 15, 2015 from: https://www.ourtesco.com/2014/09/17/clickcollect-groceries-now-
available-300-locations/
Planet Retail. (2015). “Retailer Profile: TESCO”.
Retail Week (Feb 2015) “Tesco reveals online grocery profits”, Retrieved on Sept 10, 2015 from:
http://www.retail-week.com/sectors/food/tesco-reveals-online-grocery-profits-as-it-builds-
multichannel-offer/5057772.article
Telegraph UK (Feb 2015), “Tesco under investigation over suspected supplier mistreatment”, Retrieved
on Sept 9, 2015 from: http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/113917-
00/Tesco-under-investigation-over-suspected-supplier-mistreatment.html
Tesco.com. Measuring Our Carbon Footprint. http://www.tesco.com/climatechange/carbonFootprint.asp.
Tescoplc.com. Our Carbon Footprint. http://www.tescoplc.com/index.asp?pageid=89
UK, Reuters (June 2015), “Tesco seeks fresh start with suppliers who survive cull”, Retrieved on Sept 15,
2015 from: http://uk.reuters.com/article/2015/06/30/uk-tesco-suppliers-idUKKCN0PA16T20150630
Page | 8Tesco Retail Innovation in the U.K.
Global Analysis Report
Prepared by: Chris Emond, Market Analyst
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